Negative Interest Rates – implications for Affordable Housing Providers
In December 2020 our sister company Altair, sponsored by ten HAs operating across the country, kicked off a research review of the practical impacts that Negative Interest Rates (NIR) set by the Bank of England (BoE) could have on the HA business model and the affordable housing sector.
The BoE recently asked financial institutions how prepared they were for Negative Interest Rate Policy (NIRP), which would see the BoE drop Base Rate from 0.1% currently to negative. NIRP is used to stimulate a struggling economy when interest rates are already low and when other monetary and policy tools have been used. It is intended to discourage consumers from saving. Instead, it should encourage borrowing, investment and spending to increase economic output and improve employment.
Altair’s new report takes a deeper look at what NIRP is, why the BoE is considering it and how it could impact the HA business model and the wider affordable housing sector.
The report is underpinned by desktop research, analysis, and interviews. This, combined with confidential modelling of sponsors’ data, illustrates the impact on their business plans of NIRP and resultant macroeconomic scenarios.
Altair found that NIRP and an NIR environment could significantly impact HAs. There may be greater demand for services and investment, less income and greater financial pressures posed by exposures and security. Impacts include:
- Tenants and Residents: Tenants’ ability to pay rent, demand for home ownership and demand for services will be affected by changes to benefit levels and employment status.
- Income and Costs: Social housing rent settlement is tied to inflation. Rent settlement policy could change because of negative price inflation. Inflation could also impact costs, particularly if they increase at different rates and differently from rents.
- Security and Valuation: HAs provide security to their lenders in the form of rental streams and assets, both of which may be impacted by the NIR environment. Risks on Mark-to-Market valuations of interest rate derivatives will increase, so more cash or security may be required. Security covenant breaches could result in regulatory intervention and higher debt charges.
- Cash and Cost of Finance: NIRP could result in a cost of holding cash. This is more likely for corporate entities
whichbut could include some HAs. If NIRP is successful, HAs should have greater access to low-cost finance. But if NIRP does not work as intended, it may mean banks tighten their lending.
- Housing Market and Sales Exposure: HAs are exposed to the market through their rental and sales programmes, both of which could be negatively impacted if housing markets suffer in the future. NIRP’s effectiveness could determine if mortgage availability increases or decreases.
- Economic, Social and Environmental Responsibility: HAs may face reduced income and tightened capacity to borrow in a time where they are expected to invest billions to make their homes carbon neutral and fire safe.
The true impact of NIRP and the NIR environment will likely depend on future government decisions on rent settlement and grant. HAs may be able to respond to these challenges by leveraging the opportunities of NIRP and the NIR environment.
In any case, HAs should monitor the impact of open market exposures on capacity and NIRP on financial covenants. For support, contact Jim Lashmar, Director Altair or Derek Joseph, Aquila Services Group Chair.
Click here to read the full report which includes four strategies developed and assessed by HAs to respond to NIRP if implemented — such as borrowing cheaply to invest or paying down existing debt.
Click here to view the summary slides.
For more information about this report or Altair’s research and insights offer, contact Cassidy Curls, Consultant, Altair.